US Dollar Forecast: PPI Surge Puts 2026 Fed Hike in Play, USD Catch-Up Trade?

PPI, US Dollar Key Points

• US PPI came in FAR above expectations at 1.4% m/m, 6.0% y/y, with Core PPI also beating expectations.
• Traders are now pricing in a 40% chance of a Fed rate hike by the end of the year, despite the imminent confirmation of ostensibly dovish Chairman Kevin Warsh.
• Rising interest rates suggest that the US Dollar Index (DXY) could play “catch up” toward 99.00

If you thought yesterday’s CPI report was bad a bad sign for price pressures, today’s PPI report was on a whole other level entirely.

US producer prices surged in April, reinforcing traders’ concern that inflation pressure is rebuilding across the supply chain. The headline PPI reading jumped 1.4% on the month and 6.0% from a year earlier, well above both economist estimates and the prior month’s pace (0.7% and 4.3% respectively). Goods prices rose 2.0%, led by a 7.8% surge in energy, while services increased 1.2%. Transportation and warehousing costs were especially firm, rising 5.0%, with truck freight up 8.1%.

Core pressures also looked sticky, as Core PPI (prices excluding food and energy) climbed 1.0% on the month and 5.2% year over year.

For markets, the report is a clear hawkish signal. It raises the risk that higher input costs bleed into consumer prices, limiting the Federal Reserve’s room to cut rates and keeping bond yields sensitive to incoming inflation data, on the very day that new Fed Chairman Kevin Warsh is expected to be officially confirmed by the US Senate. To wit, US Treasury yields across the curve rose to their highest levels in nearly a year, with the 2-year yield testing the 4.00% level, 10yr yields at 4.5%, and the 30-year bond now offering above 5%.

With the labor market remaining remarkably resilient at near “full employment,” the above-target and rising inflation readings we’ve seen in recent months could well push the Federal Reserve into raising rates this year. According to the CME’s FedWatch tool, traders are pricing in a 10% probability of a 25bps rate hike by the end of the third quarter, and a 40% chance of at least one rate hike by the end of the year:

Source: CME FedWatch

US Dollar Technical Analysis: Dollar Index 4-Hour Chart

Source: Tradingview, StoneX

Looking at the chart of the US Dollar Index (DXY), the world’s reserve currency is not necessarily keeping pace with rising yields. While DXY is gaining 0.2% on the day so far, it has diverged notably from rising 2yr yields, a proxy for near-term Fed interest rate expectations, since the start of the month.

While there are numerous factors at play, rising interest rates make the US dollar relatively more attractive and suggest that the greenback could play “catch up” toward 99.00 if it can break above near-term technical resistance in the 98.60 area.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX